Financiers should watch for ‘stagflation,’ economist says

NEW YORK — Financiers need to keep an eye on “stagflation” as the cost of goods and services continues to increase as a result of coronavirus-induced supply chain constraints, the compounding effects of the war in Ukraine and rising energy prices.

Stagflation — last seen in the 1970s amid skyrocketing energy prices — is an economic scenario categorized by slow economic growth and high unemployment accompanied by increased pricing of goods and services. Supply chain constraints have already pushed the consumer price index (CPI) to 7.9% in February and will likely continue to rise due to new supply chain challenges spurred by Ukraine and the rising costs of services that aren’t reliant on global manufacturing and shipping infrastructures.

“If you go back to the late 70s — just take ‘75 to ‘82, for example — it was a period of 9% inflation and 7.5% unemployment. We certainly aren’t there yet; I’m not freaking out about stagflation, but it is a risk that we have to start thinking about,” Robert Wescott, president and founder of Washington, D.C.-based consultancy firm Keybridge Research said today during the IMN – ELFA Investor’s Conference on Equipment Finance in New York City.

Inflation nation

In fact, inflation on CPI could reach 9% or 10% in the next month or two, driven by services not constrained by supply bottlenecks, Wescott said.

“We saw all this talk in 2021 [that] inflation was caused by supply chain disruptions, and I didn’t accept that story,” he said. “One of the things we do … is we created the ‘Keybridge Top 25 CPI Categories to Watch,’” which add up, in aggregate, to 61% of the weights in the CPI.

“This is our measure of true underlying inflation in the American economy,” Wescott said, pointing to the rising prices of metrics such as rent, wireless telephone bills, insurance, financial services and electricity, among others.

In fact, the Keybridge Top 25 index jumped to 6.2% in February on a six-month annualized rate after steadily rising for more than one year.

“We look at the last six months and we annualize it and try to get a signal out of that, and unfortunately we’re seeing that underlying inflation still picking up,” Wescott said. “If you get inflation ramping up in the service sector in terms of the wage story — especially in professional services — you’re starting to get an inflation problem that’s not going to go away easily.”

The Federal Reserve will have to raise its interest rates substantially to reign in inflation, he added.

“I think many people are saying, ‘Well, we can have what some people call immaculate disinflation,’” Wescott said. “The Fed will just perfectly raise interest rates. They’ll just nudge them up to step here — 25 basis points, [another] 25 basis points — and we’ll kind of squeeze inflation out and no one will get hurt and everything will be fine.

“That’s not the way this works,” he said.

“For interest rate increases to do their job, they have to cause some pain in the economy. They have to hit asset values; they have to hit housing starts; they have to hit auto sales; they have to hit [capital expenditures] and I do think we are going to see more interest rate [increases] coming that people realize,” Wescott said. “I fear the Fed is going to have to raise interest more like 6% or 8% to get this inflation thing under control.”

This story first appeared on Auto Finance News, a publication of Royal Media.